A 76-year-old Investors Chronicle reader has written in to ask if he should reinvest into NS&I’s Index-linked Savings Certificates once his holdings mature. These certificates offer low-risk inflation protection and represent just over 5 per cent of his portfolio. He is holding them as a "calamity cash resource" for if he ever needs additional funds at short notice.
The last public issues of index-linked savings certificates were withdrawn in September 2011 and until now anyone who had managed to pick some up for their portfolio would have considered themselves lucky. Our reader says: "Given in the next five years there is the possibility of uncertain times due to unravelling QE, deterioration of sterling and hence substantial inflation again, rolling them over seems a special opportunity."
But with some commentators warning of a deflation risk - where prices of goods and services fall over time instead of rising, our reader also wonders if he might be better off ditching them.
NS&I Index-linked Savings Certificates are lump sum investments, designed to be held for fixed terms. They pay a fixed rate of interest on top of the rate of inflation, as measured by the Retail Prices Index (RPI), to ensure that savings stay ahead of rising prices. On each anniversary interest and index-linking are added to the Certificate.
Having invested £15,000 at the end of February 2010 on a five-year term, our reader's Certificates are now worth £18,500. He says: "I forecast that they will reach about £19,000 by end of next February. This will show interest of an average £800 a year giving a yield of 5.3 per cent a year, free of income tax and capital gains tax. The income tax free element would make the gross return around 5.83 per cent a year." That is a fantastic result, considering cash held in the best individual savings accounts over the same period would not have kept pace with inflation.
However, for anyone with Certificates reaching maturity, NS&I will now only offer RPI + 0.05 per cent for reinvestment, compared with the 2010 terms of RPI + 1.00 per cent. The new certificates would also be subject to early encashment penalties.
Considering other options to beat inflation - dividend stocks, for example - involve taking on risk, rolling over still makes sense for most Certificate holders, particularly higher rate taxpayers. A 76-year-old man is expected to live on average another 10 years - plenty of time for inflation to resurge. The important thing to remember is that even during a period of deflation, your capital will be protected and you will earn the small amount of interest that is guaranteed.
